What are the implications of the Digital Service Tax introduced by HMRC?

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The UK Government introduced a Digital Service Tax in an endeavour to bring Internet Giants such as Amazon, Facebook, and Google under the tax purview. The Digital Service Tax or the DST shall apply on specific digital activities the value of which exceeds specified threshold limits. A draft for the proposed digital service tax came for the first time more than a year ago, in June 2019. A proposal for the same was put forth in the Budget of 2018. The UK government confirmed the applicability of the digital service tax in the Spring Budget of 2020. DST was made applicable to revenue earned for particular digital activities from 1 April 2020. It came into effect with the assent of the Finance Bill 2020. The tax liability is regulated through the provision of section 54 of the Finance Act 2020.

The UK, with the enforcement of DST, is part of the group of European Countries like France and Italy that impose DST. The OECD (Organization for Economic Cooperation and Development) and the US Government opposed the institution of DST in the UK. There was the expectation of a multilateral digital services tax from the OECD. However, the introduction of the same is still uncertain. The COVID-19 Pandemic has led to considerable delay in the international agreement for a digital economy tax. Hence, the UK Government came up with the tax legislation itself. The launch of the Digital Service Tax may get revoked shortly after a staunch multilateral scheme comes up.

Let us now explore the crux of the new Digital Service Tax and how it will affect the reigning kings of the Internet world.

General Rule

The Digital Service Tax shall apply at the rate of 2 percent on earnings of big internet companies attributable to users of the United Kingdom. The tax shall impose on the revenue excluding any VAT amount. The companies falling under the Digital Service Tax Bracket shall provide specified digital services. Digital Service Tax Liability may also get imposed on a multi-national entity that has neither a permanent establishment nor a registered company in the UK.

Activities covered under Digital Service Tax

For the purpose of the imposition of Digital Service Tax, the revenue arising from activities for providing digital services shall get considered. Digital Services Activities cover services attributable to internet search engines, provision of social media platforms, or running an online marketplace. These services are available to any user in the United Kingdom. You can regard the activities covered under DST as the in-scope activities.

  1. Internet Search Engines

HMRC shall impose Digital Service Tax on Internet Search Engines like Google. There is no specific definition outlined in the statute for Internet Search Engine. It is important to note that a website that gets an internal search engine is not covered under the Digital Service Tax. However, there can be a third party technology company such as Bing or Google that helps websites to showcase external results. In such cases, the third-party service provider will be considered as doing an in-scope activity.

  1. Social Media Platforms

The Digital Service Tax shall be enforceable on social media platforms. Social Media Platforms cover professional or social networks, video or image sharing platforms, dating platforms, review platforms, and blogging or discussion platforms.

A social media platform is an online service platform that complies with the two conditions. It promotes interaction between the users on the platform and has different user content as a significant feature of the service. The meaning is in line with the amended definition in the DST legislation.

  1. Online Marketplace

Another in-scope activity is the service of an online marketplace. A marketplace has the primary purpose of facilitating the sale of goods and services from various third-party sellers to online users. Online Marketplaces covers entities that bring users together even when the sale occurs outside the platform. The in-scope activity, however, excludes online marketplaces providing facilities for the sale of financial services.

Meaning of the term UK Users

For the applicability of Digital Service Tax, those services shall get included that are available to UK Users. A UK User can be an individual residing in the UK or a business establishment located in the UK. It is important to determine where the user is located at the time of availing the online service. Certain evidence is used to finalize the location of the user. The sources of evidence cover payment details, delivery address, advertising destination as per contract, IP address, or location of rented property or goods.

Threshold Limits for applicability of Digital Service Tax

A business that provides services related to the online marketplace, social media platform, or search engine to UK users, needs to get registered for payment of digital service tax. The business through digital activities must generate:

-Annual global revenue of more than £500 million


-Annual revenue from the UK of more than £25 million.

The above limits shall get pro-rated if the accounting period was less than 1 year.

A company or group has the option to get charged on a safe harbour basis. It considers the operating margin to determine the levy of DST. No DST is liable for any loss-making digital service activity. Certain foreign users can avail of relief of 50 percent. In circumstances where a foreign digital service tax is also imposed, one can use the relief to avoid double taxation.

Registration Requirements

The online businesses which have revenues beyond the stated threshold limits need to register in 90 days of the end of their first Digital Service Tax accounting period. Companies under one group can get registered for DST as a Group. A group needs to choose a responsible member to represent them to the HMRC.

Necessary contact details and company info needs to be filed with the HMRC for registration purposes. The details shall vary depending on whether one registers as a single business or as a group of companies. Registration must be obtained online with the relevant Government Gateway ID and Password.

Due Dates and Filing Regulations

Liable companies must pay their Digital Tax Liability within 9 months from the end of the accounting period. In the case of a group company, each of the individual companies is liable for DST based on a proportionate amount as per its share in the group revenue.

Any change in the registration information must be filed with HMRC in 90 days of the date of the change. The company or the nominated entity in the case of a group has to file a tax return for each accounting year. The return shall include the self-assessed sum of DST payable. Interest and penalties shall apply for the late payment of the digital service tax.

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